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3 reasons for understanding audit client before accepting audit engagement.

It is essential that all members of the audit team fully understand the client’s industry, business and organization. This is so because:  

  • Only in that way can they judge the risks associated with the engagement;
  • An economical and effective audit can only be carried out with a full knowledge of significant environmental, operational and organizational factors;
  • Knowledge of the factors helps in communication with client’s staff, in assessing the reliability of management representations and in judging the appropriateness of accounting policies and disclosures.

This knowledge can be gained from:

  • the client’s annual report and accounts;
  • analytical review of the client’s interim accounts, financial reports, variance analyses, etc.
  •  internal audit reports;
  • visits to the client’s premises and discussions with management and staff;
  • perusal of minutes of shareholders, directors, audit committee, budget committee, etc;
  • previous year’s audit files including the permanent file;
  • consideration of the state of the economy;
  • reports from within the audit firm which may be relevant to the client, for example, management consultancy and appropriate tax authorities;
  • perusal of relevant literature from credit rating agencies, stockbrokers, investment analysts;
  • Perusal of relevant trade magazines and journals.

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